Biopharma might start playing to the masses as crowdfunding takes shape
By Mari Serebrov
2014 could usher in the year of the crowd for biopharma start-ups, depending on how long it takes the SEC to finalize its crowdfunding rule and what the final rule looks like.
If it reflects the proposal the commission unveiled in October to implement the crowdfunding provisions in the 2012 Jumpstart Our Business Startups (JOBS) Act, the rule could help small biotechs get the seed money they need to get off the ground. (See BioWorld Today, Oct. 25, 2013.)
Although the proposed rule limited the annual funding that could be raised by a crowd of unaccredited investors to $1 million, which isn’t a lot when it comes to biopharma, it would allow companies to raise other capital through more conventional means, Judd Hollas, founder of Equitynet LLC, told BioWorld Today.
As long as the $1 million cap applies only to crowdfunding among unaccredited investors, and not other funding sources, biopharma could benefit from the crowd, he added.
In general, the proposed rule is true to the intent of the JOBS Act, which is intended to open new avenues of funding for small businesses and ease restrictions on some of the older routes. There’s nothing in the crowdfunding rule that “would prohibit this business from booming and becoming a wonderful source of capital,” Hollas said.
However, it could be a while before crowdfunding is available. Once the comment period closes Feb. 3, the SEC will have to address the comments it receives and issue the final rule. When that’s in place, the portals that will introduce companies to the crowd will need time to meet SEC requirements and register with the commission before they raise the curtain on the offerings.
Of all the provisions in the JOBS Act, crowdfunding is perhaps the effort most focused on the democratization of capital, as it gives people who aren’t accredited investors the opportunity to put some money where their heart is. While individuals who are more interested in seeing cures or therapies developed for specific diseases rather than quick returns may take advantage of these new opportunities to invest in biotech, that doesn’t mean the masses will crowd to biopharma’s door.
For the average person looking for a chance to get in on the opening act of a promising start-up, biopharma may not be the right play. With its long product development times and need for extensive capital, biopharma is one of the highest risk/return asset classes. As such, it will appeal to a limited group of unique investors in both the accredited and unaccredited crowds, Hollas said.
While crowdfunding among the masses is just now becoming a possibility, many privately owned biotechs have been playing for several years to the accredited investor crowd through online matchmaking services such as Equitynet, of Fayetteville, Ark. Except for the limits on how much can be raised, that experience could provide an idea of what’s in store when crowdfunding hits Main Street.
Since its founding in 2005, Equitynet has helped companies, including a number of biotechs, raise more than $200 million from accredited individuals, angel groups, venture capitalists and debt providers. About 15 percent of the investors that use Equitynet are interested in biopharma, Hollas said. And about 30 percent of the biopharma companies that use the site are start-ups.
Those firms, which generally have nothing in the bank, set an average Equitynet goal of $3.7 million – nearly four times higher than the limit for crowdfunding among unaccredited investors. The Equitynet average for more mature biopharma firms, which may have $5 million to $10 million in revenue, is about $3.4 million.
Typically, the businesses listed on Equitynet use the site as their primary source of funding, even though they’re encouraged to explore every opportunity to raise capital, Hollas said. Because of the $1 million cap on unaccredited crowdfunding, biotechs that go that route will have to use it to supplement other revenue sources.
Despite the limitations of the new crowdfunding possibilities, Hollas said, “any solution is a great solution,” given the acute need for capital for small businesses.
As he looks toward 2014 and beyond, Hollas expects great things from the JOBS Act, once it’s fully implemented. “We’re just beginning,” he said, adding that no one is fully aware yet of the impact the law will have as it opens capital markets to small businesses and creates new streams of possibility.
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